Israel enacts economic austerity measures

An Ultra-Orthodox Jew carries sacks full of wheat. The Israeli government enacted a series of austerity measures this week as it finally begins to feel the pinch of the global economic slowdown.

JERUSALEM — Pressures on the sturdy Israeli economy came to a head this week, and in response, the government announced an array of immediate austerity measures.

Some of the economic stress is a reflection of a slowdown in the global economy, and the rest, a reflection of purely local demands, including less than expected tax revenues and greater than planned public outlays.

In Israel, it is still a common sight to see bleary-eyed family members scurrying down to a local grocery store to pick up a loaf of fresh bread in the morning. The price, like the product, is usually entirely predictable. Israel continues to subsidize and regulate numerous staples such as bread, milk and chicken, a legacy of its early years of scarcity.

This week, however, Israelis awoke to more costly bread, precisely 6.5 percent more expensive.

As part of the new austerity measures put into place by the government of Prime Minister Benjamin Netanyahu, which include revenue-raising measures, the prices of cigarettes, alcohol, bread and other essential foodstuffs have risen significantly.

Meirav Achrak, the chief cashier at Super HaMoshava, a small independent supermarket in the German Colony neighborhood of Jerusalem, spent the morning changing price stickers on the entire bread aisle.

In her market, the price for basic price-controlled bread rose from about $1.50 to about $1.83. The price of cigarettes has also risen, proportionally, by triple that amount.

"Today is the first day," Achrak said. "So for now it’s a subtle effect, but of course there's an effect. The thing is that everything has gone up, all at once. And just wait till the new Value Added Tax kicks in!"

A decrease in tax revenues brought about by international market conditions, such as higher wheat and fuel costs and a weak purchasing market, plus an increase in the cost of living unaccompanied by proportional salary increases, has put unexpected pressures on the local economy. Added to that are unbudgeted outlays such as the cost of free full-time education for children from the age of three, and a significant budget deficit presented itself.

On Wednesday, the government announced that prices for chicken, turkey, milk and eggs — all regulated and all staples — will rise by up to 14 percent in the coming two weeks.

The government also intends to raise Israel's Value Added Tax from 16 percent to 17 percent.

As such, Achrak is trying, so far unsuccessfully, to kick her pack a day habit. (An average cigarette pack now costs $7.17.)

"Instead of taking more from us," she says of government ministers, they should be "taking out of their own pockets."

Since the global economic crisis of 2008, Israel has seemed almost preternaturally resilient, relying on its efficient high-tech sector.

Relative to Europe it still is resistant, but a shortfall in revenues and an increase in public expenditures — some created by pressure brought upon the government by last summer's Occupy-style street protests — brought Netanyahu and his Finance Minister, Yuval Steinitz, to attention.

Israel's economy is not shrinking, but the rate of growth has slowed. The government instituted the array of austerity measures with lightening speed, most affecting the lower and more vulnerable classes more than the upper echelons.

"It is very problematic," says Prof. Dan Ben David, an economist at Tel Aviv University and the director of the Taub Center for Social Policy Studies. "In a situation like this, with greater outlays and decreased inlays, one possibility the government has is to take out loans to cover the deficit. This puts us at risk especially if we eventually find ourselves in a worse crisis. If we hit a recession, we will be borrowing at elevated interest rates."

The Bank of Israel, similarly, has warned of the perils of elevated interest rates.

Ben David believes the government is unwilling to tackle the structural problems in Israel's economy, such as the fact that only 50 percent of the population pays income taxes. One example he mentions are ultra-orthodox Jews. The men generally study religious texts full-time while enjoying government subsidies; the women take care of the household and numerous children, only occasionally working part time to contribute something to the family income. As a result, they do not earn enough to fall into tax-bearing brackets, and comprise, according to Ben David, a drain on the tax-paying middle-class.

"We have elderly in Israel who live in abject poverty, yet we have families here in which both parents don't work by choice, and are able to choose non-work as a lifestyle," he points out.

"Nobody really wants to deal with that issue, so they take the easy route and just raise taxes. I think we need to take a good hard look at our expenditures, on what, and on who, we are spending, and ask if we really think we should spend that much money where we are spending it," he said.

In announcing the measures, Netanyahu made a gaffe that provoked a wave of public mockery: attempting to justify the increased tax burden, he said, "There is no free lunch."

"I wanted to tell you that from the day I finished my military service (about 18 years ago) and served my duty to the state with love, I simply sit doing nothing, waiting everyday for one in the afternoon. Why? Because I know that then you will knock on the door and I will open it, and you will serve me my free lunch!" she wrote, launching a massive reaction.

Labor party leader Shelly Yachimovich declaimed the entire statement out from the floor of Israel's parliament.

Asher Blass, a professor of economics at Ashkelon College and the managing director of the Economic Research and Consulting Group, blamed a chaotic economic management style for the nation's current predicament. In particular, he said, he blamed the government's sudden response to many of the demands made by last summer's social justice protesters.

"The original sin of all this are wage increases for many public service jobs such as doctors and teachers that have not been accompanied by any structural reform. The middle class has to pay for it all. We now have expanded free education for 3- and 4-year-old children, but no one is undertaking steps to render the system of education more efficient."

"There is a deficit in national budget. Our expenses grew and tax revenues have decreased, but it is a real pity that the solution found is too reliant on taxes and not significant enough on cuts."